a16z Partner's Self-Description: Boutique VC is Dead; Scaling Up Is the Ultimate Goal for VC

Author: Erik Torenberg

Compiled by: Deep潮 TechFlow

Introduction: In the traditional narrative of venture capital (VC), the “boutique” model is often celebrated, with the belief that scaling would lead to losing soul. However, a16z partner Erik Torenberg presents a counterpoint: as software becomes the backbone of the U.S. economy and with the advent of the AI era, startups’ demand for capital and services has fundamentally changed.

He argues that the VC industry is shifting from a “judgment-driven” paradigm to a “transaction-winning capability-driven” one. Only large-scale platforms like a16z, capable of providing comprehensive support to founders, can succeed in a trillion-dollar game.

This is not just an evolution of the model but a self-innovation of the VC industry amid the wave of “software devouring the world.”

Full Text:

In Greek classical literature, there is a meta-narrative above all: respect for the gods and disrespect for the gods. Icarus was burned by the sun, not fundamentally because of his ambition, but because he disrespected divine order. A more recent example is professional wrestling. Just ask, “Who respects wrestling, and who disrespects wrestling?” and you can distinguish between the face (hero) and the heel (villain). All good stories take this or that form.

Venture capital (VC) also has its own version of this story. It is told as: “VC used to be, and still is, a boutique business. Large institutions have become too big, with goals too high. Their downfall is inevitable because their approach is essentially disrespectful to the game.”

I understand why people want this story to hold. But the reality is, the world has changed, and so has venture investing.

Today, software, leverage, and opportunities are greater than ever. The number of founders building larger companies has increased. Companies stay private longer than before. And founders’ expectations of VCs are higher. Today, the best founders need partners who can truly roll up their sleeves and help them win, not just write checks and wait for results.

Therefore, the primary goal of modern VC firms is to create the best interfaces to help founders succeed. Everything else—how to staff, how to deploy capital, how large a fund to raise, how to assist in deals, and how to allocate power to founders—is derived from this.

Mike Maples has a famous saying: “Your fund size is your strategy.” Equally true is that your fund size reflects your belief in the future. It’s a bet on the scale of startup output. Raising huge funds over the past decade might have been seen as “arrogant,” but fundamentally, this belief is correct. So when top institutions continue to raise massive amounts of capital to deploy over the next decade, they are betting on the future and backing their commitments with real money. Scaled venture capital is not a corruption of the VC model; it is the model maturing and adopting the characteristics of the companies it supports.

Yes, VC firms are an asset class

In a recent podcast, Sequoia’s legendary investor Roelof Botha offered three points. First, despite the growth in VC size, the number of “winners” each year remains fixed. Second, the scaling of the VC industry means too much capital chasing too few great companies—thus, VC cannot truly scale; it is not an asset class. Third, the industry should shrink to match the actual number of winners.

Roelof is one of the greatest investors ever and a good person. But I disagree with his view here. (Of course, it’s worth noting that Sequoia itself has scaled: it’s one of the largest VC firms globally.)

His first point—that the number of winners is fixed—is easily falsifiable. Ten years ago, about 15 companies had revenues of $100 million; now, about 150 do. Not only are there more winners, but their scale is larger. Although entry prices are higher, the output is much greater than before. The growth ceiling for startups has risen from $1 billion to $10 billion, and now to $1 trillion or more. In the 2000s and early 2010s, companies like YouTube and Instagram were considered billion-dollar acquisitions—so rare that we called companies valued at $1 billion or more “unicorns.” Today, we directly expect OpenAI and SpaceX to become trillion-dollar companies, with several others following.

Software is no longer a marginal sector of the U.S. economy composed of oddballs. Software is now the economy. Our largest companies and national champions are no longer General Electric or ExxonMobil but Google, Amazon, and Nvidia. Private tech companies now account for about 22% of the S&P 500. Software has not finished devouring the world—in fact, with AI-driven acceleration, it has only just begun—and it is more important than 15, 10, or 5 years ago. Therefore, a successful software company can reach a scale larger than ever before.

The definition of “software company” has also changed. Capital expenditures have surged—large AI labs are becoming infrastructure companies, with their own data centers, power plants, and chip supply chains. Just as every company is becoming a software company, now every company is becoming an AI company, or perhaps an infrastructure company. More and more companies are entering the atomic world. Boundaries are blurring. Companies are aggressively verticalizing, and these vertically integrated tech giants have market potential far beyond that of any pure software company.

This leads to why the second point—too much capital chasing too few companies—is wrong. The output is much larger than before, competition in the software world is fiercer, and companies go public much later. All these mean that great companies need to raise far more capital than before. The existence of VC is to invest in new markets. Time and again, we learn that in the long run, the scale of new markets is always much larger than we expect. The private markets are mature enough to support top companies reaching unprecedented scales—just look at the liquidity top private companies now enjoy—and both private and public investors now believe that VC output will be enormous. We have been misjudging how large VC as an asset class can and should become, and VC is scaling to meet this reality and the opportunity set. The new world needs flying cars, global satellite grids, abundant energy, and cheap, unmetered intelligence.

The reality is, many of today’s best companies are capital-intensive. OpenAI spends billions on GPUs—more than anyone might imagine for computational infrastructure. Periodic Labs needs to build automated labs at unprecedented scale for scientific innovation. Anduril is building the future of defense. All these companies must recruit and retain the world’s top talent in the most competitive labor markets in history. The new generation of big winners—OpenAI, Anthropic, xAI, Anduril, Waymo, and others—are capital-intensive and have raised huge initial rounds at high valuations.

Modern tech companies often require hundreds of millions of dollars because building world-changing advanced technology infrastructure is prohibitively expensive. During the dot-com bubble, a startup was entering an empty space, anticipating the needs of consumers still waiting for dial-up connections. Today, startups are entering an economy shaped by three decades of tech giants. Supporting “Little Tech” means being prepared to arm David against Goliaths. In 2021, companies indeed received overfunding, much of it flowing into sales and marketing to sell products that didn’t return 10x. But today, capital flows into R&D or capital expenditures.

Thus, winners are much larger and need to raise far more capital, often from the start. So, it’s natural that the VC industry must become much bigger to meet this demand. Given the scale of opportunities, this scaling is reasonable. If VC size were too large for the opportunities, we would see poor returns from the biggest institutions. But we don’t. As they expand, top VC firms repeatedly deliver high multiples—those who invest in these firms also benefit. A famous VC once said that a $1 billion fund can never achieve a 3x return because it’s too big. Since then, some funds over $1 billion have achieved over 10x returns. Some point to underperforming firms to criticize the asset class, but any industry following a power-law distribution will have huge winners and long-tail losers. The ability to win deals without relying solely on price is what allows these firms to sustain consistent returns. Unlike other asset classes, where products are sold or loans are made to the highest bidder, VC is a unique asset class where competition occurs across multiple dimensions beyond price. VC is the only asset class with significant and persistent top-tier players.

The last point—that the VC industry should shrink—is also wrong. Or at least, it would be bad for the tech ecosystem, for creating more intergenerational tech companies, and ultimately for the world. Some complain about the second-order effects of increased VC funding (and there are some!), but it also leads to a significant increase in startup valuations. Advocating for a smaller VC ecosystem likely also means advocating for smaller startup valuations, which could slow economic growth. This perhaps explains why Garry Tan recently said in a podcast: “VC can and should be 10 times bigger than it is now.” Certainly, if there were no more competition and a single LP or GP was the “only player,” that might benefit them. But more VC funding overall is clearly better for founders and the world.

To illustrate further, let’s consider a thought experiment. First, do you think there should be many more founders in the world than today?

Second, if we suddenly had ten or a hundred times more founders (spoiler: this is happening), what kind of institutions would serve them best?

We won’t dwell too long on the first question because, if you’re reading this, you probably agree the answer is obviously yes. We don’t need to tell you why founders are so excellent and important. Great founders create great companies. Great companies develop new products that improve the world, organize and direct our collective energy and risk appetite toward productive goals, and generate disproportionate new enterprise value and interesting jobs. And we are far from reaching a balance where every capable person has already founded a company. That’s why more VC can help unleash more growth in the startup ecosystem.

But the second question is more interesting. If we wake up tomorrow and the number of entrepreneurs is 10x or 100x today (spoiler: this is happening), what should the startup institutions look like? How should VC evolve in a more competitive world?

Play to win, rather than lose everything

Marc Andreessen likes to tell a story about a famous VC who said the VC game is like a conveyor belt sushi restaurant: “A thousand startups come around, you meet with them. Then occasionally, you reach out, pick one off the conveyor, and invest.”

That’s how most VC operated—well, for most of the past few decades. In the 1990s or 2000s, winning deals was that easy. Because of that, the only real skill for a great VC was judgment: distinguishing good companies from bad.

Many VC still operate this way—basically like they did in 1995. But the world beneath them has changed dramatically.

Winning deals used to be easy—like grabbing sushi off a conveyor. Now, it’s extremely hard. Some describe VC as poker: knowing when to pick a company, at what price, and so on. But that may obscure the full-scale war needed to secure the best deals. Old-school VCs nostalgic for the days when they were “the only players” and could command founders’ obedience. But now, thousands of VC firms compete, and founders are more accessible than ever with term sheets. As a result, the best deals involve fierce competition.

The paradigm shift is that, winning deals, the ability to close the right deals, is becoming as important—if not more so—than picking the right companies. If you can’t get in, what’s the point of choosing the right deal? Several factors drive this change. First, the explosion of VC firms means they must compete with each other to win deals. With more companies competing for talent, customers, and market share, top founders need strong institutional partners to help them win. They need resource-rich, networked, infrastructure-backed firms to give their portfolio companies an edge.

Second, since companies stay private longer, investors can participate in later-stage rounds—when companies are more validated—leading to more intense deal competition, yet still delivering VC-style returns.

Third, and least obvious, is that selecting deals has become somewhat easier. The VC market has become more efficient. On one hand, more serial entrepreneurs are creating iconic companies. If Elon Musk, Sam Altman, Palmer Luckey, or another serial founder starts a company, VCs will quickly line up to invest. On the other hand, companies scale to crazy sizes faster (thanks to longer private phases and larger upside), reducing the risk of product-market fit (PMF). Finally, with so many great institutions, founders find it easier to reach out to investors, making it harder for others to be the sole pursuer. Selection remains core—choosing the right company at the right price—but it’s no longer the most critical factor.

Ben Horowitz hypothesizes that the ability to repeatedly win deals automatically makes you a top institution: because if you can win, the best deals will come to you. Only when you can win any deal do you have the right to pick. You might not always pick the right one, but at least you have the chance. Of course, if your firm can repeatedly win the best deals, it will attract top pickers—those who want to get into the best companies. (As Martin Casado told Matt Bornstein when recruiting him to a16z: “Come here to win deals, not lose deals.”) So, the ability to win creates a virtuous cycle that enhances your selection power.

For these reasons, the game has changed. My partner David Haber described the shift in his article: “Institution > Fund (Firm > Fund).”

In my view, a fund (Fund) has only one goal: “How can I generate the most carry with the least personnel and in the shortest time?” A firm (Institution), however, has two goals. One is to deliver outstanding returns; the other, equally important, is: “How can I build a source of compounding competitive advantage?”

The best firms will be able to reinvest management fees into strengthening their moat.

How can I help?

Ten years ago, I entered venture capital and quickly noticed that Y Combinator played a different game. YC can secure favorable terms at scale and also serve its companies at scale. Compared to YC, many other VCs are playing a commoditized game. I would attend Demo Day and think: I’m at the betting table, and YC is the house. We’re both happy to be there, but YC is the happiest.

I soon realized YC had a moat. It has positive network effects. It has structural advantages. Some have said VC firms can’t have moats or unfair advantages—after all, they’re just providing capital. But YC clearly does.

That’s why YC remains powerful even as it scales. Some critics dislike YC’s growth; they believe YC will eventually lose its soul. For over a decade, people have predicted YC’s demise. But it hasn’t happened. During that time, they replaced their entire partner team, and the firm still thrives. The moat is the moat. Like the companies they invest in, scaled VC firms’ moats are not just about brand.

Then I realized I didn’t want to play the commoditized VC game, so I co-founded my own firm and other strategic assets. These assets are highly valuable and generate strong deal flow, giving me a taste of the differentiated game. Around the same time, I started observing another firm building its own moat: a16z. So, years later, when the opportunity to join a16z arose, I knew I had to seize it.

If you believe in venture capital as an industry, you—by definition—believe in a power-law distribution. But if you truly believe VC is governed by a power law, then you should believe that VC itself will follow a power law. The best founders will cluster around those institutions that help them most decisively win. The best returns will concentrate there. Capital will follow.

For founders trying to build the next iconic company, scaled VC offers an attractive product. They provide expertise and comprehensive support for rapid growth—recruiting, go-to-market strategies, legal, finance, PR, government relations. They provide enough capital to reach their destination, rather than forcing founders to penny-pinch and struggle against well-funded competitors. They offer enormous reach—access to every key person in business and government, introductions to every Fortune 500 CEO and world leader. They offer access to talent 100x better than average, with a network of tens of thousands of top engineers, executives, and operators worldwide ready to join when needed. And they are everywhere—meaning, for the most ambitious founders, anywhere.

At the same time, for LPs, scaled VC is an extremely attractive product on the simplest question: are the most rewarding companies choosing them? The answer is straightforward—yes. All large firms partner with scaled platforms, often at the earliest stages. Scaled VC firms have more opportunities to seize key companies and more ammunition to persuade them to accept their investment. This is reflected in their returns.

Excerpt from Packy’s work:

Think about where we are now. Eight of the top ten companies in the world are headquartered on the West Coast and supported by VC. Over the past few years, these companies have generated most of the new enterprise value globally. Meanwhile, the fastest-growing private companies are also mainly VC-backed firms based on the West Coast: those founded just a few years ago are rapidly approaching trillion-dollar valuations and historic IPOs. The best companies are winning more than ever, and they are supported by scaled institutions. Of course, not every scaled institution performs well—I can think of some epic failures—but almost every great tech company is backed by a scaled firm.

Grow big or specialize

I don’t believe the future is just scaled VC. Like all fields touched by the internet, VC will become a “barbell”: one end with a few ultra-large players, and the other with many small, specialized firms operating in specific niches and networks, often collaborating with scaled firms.

What’s happening in VC is exactly what happens when software devours the service industry. On one end are four or five large, vertically integrated service players; on the other, a long tail of highly differentiated small providers, built as industry is “disrupted.” Both ends of the barbell will thrive: their strategies are complementary and mutually empowering. We also support hundreds of boutique fund managers outside of institutions and will continue to do so, working closely with them.

Both scaled and boutique firms will do well; the trouble is in the middle—funds that are too big to afford missing out on huge winners but too small to compete with larger institutions offering better products to founders. a16z’s uniqueness lies in being at both ends of the barbell—both a collection of specialized boutique firms and a beneficiary of a scaled platform team.

The firms that work best with founders will win. This might mean enormous reserve capital, unprecedented reach, or a vast complementary service platform. Or it could mean unmatched expertise, top-tier consulting, or simply incredible risk tolerance.

There’s an old joke in VC: that VCs think every product can be improved, every great technology can be scaled, every industry can be disrupted—except their own.

In truth, many VCs dislike the existence of scaled VC firms. They believe scaling sacrifices some soul. Some say Silicon Valley is now too commercialized, no longer a haven for misfits. (Anyone claiming there aren’t enough weirdos in tech has never attended a San Francisco tech party or listened to MOTS podcasts.) Others resort to a self-serving narrative—that change is “disrespectful to the game”—ignoring that the game has always served founders and always will. Of course, they never express similar concerns about their own portfolio companies, which are built on the premise of achieving massive scale and disrupting their industries.

Saying scaled VC isn’t “real venture” is like claiming NBA teams shooting more threes aren’t playing “real basketball.” Maybe you disagree, but the old rules no longer dominate. The world has changed, and a new model is emerging. Ironically, the way the rules are changing here mirrors how startups supported by VC change their industries. When technology disrupts an industry and new scaled players emerge, some things are lost—but many more are gained. Venture capitalists understand this trade-off—they’ve been supporting it all along. The disruption they seek in startups applies equally to VC itself. Software is devouring the world, and it certainly won’t stop at VC.